Know Where You Are Before Starting The Journey

Money Talk

May 16, 2004|By MATTHEW LUBANKO The Hartford Courant

Q: How important is a net worth statement? How do I calculate my net worth? What are some commonly overlooked items in the calculation? And how do I value retirement assets: by the income they generate or by the principal that is generating that income?

-- C.B.W., Allentown, Pa.

A: A net worth statement, your assets minus your debts, should be a starting point for any financial plan.

The statement reveals what you own and what you owe. The statement catalogs the means you have to reach your short- and long-term goals. The process of putting together a net worth statement can also force you to organize your financial records.

"A net worth statement is a basic building block for moving forward with your finances," said Scott Mather, a certified financial planner with American Express Financial Advisors in East Hartford, Conn.

Where should youbegin when compiling this statement?

Start by gathering records of all the assets you own. This inventory should start with the familiar: cash in checking or savings accounts or bank CDs; cash value portions of life insurance policies; U.S. savings bonds; or money a relative, friend or business associate might owe you through a personal loan.

"Many people forget [U.S.] savings bonds. They so often leave them in safe deposit boxes, and they forget that the cumulative value of these savings bonds might be tens of thousands of dollars," Mather said.

Your asset inventory should also include stocks, stock options, bonds, mutual funds, your equity stake in a business, and the principal of (not the income produced by) your retirement savings such as IRAs, Keogh plans, 401(k), 403(b), 457 plans, fixed or variable annuities, SEP-IRAs and SIMPLE plans.

You should also be sure not to overlook your vested interest in a pension or profit-sharing plan. "There is often a lump sum option, as well as an annuity option, in a pension plan. The value of that lump sum can be tremendous--but you have to know what that value is," Mather said.

Beyond compiling a list of liquid assets, inventory should include your home (its appraised value, if possible), cars, furniture, jewelry, furs, antiques, art, coins, stamps and other property that might be valuable.

Once you finish the list of everything you own, your job is simple: add up the value of each asset. The sum of that list will constitute your total assets.

The liability side--the "what you owe" department--should be a little easier to assemble for your net worth statement. Your largest liability is probably the mortgage on your home: What is the remaining unpaid balance? You might also have auto loans, student loans, loans from a life insurance policy or 401(k) plan, personal loans, home-equity loans, installment loans and unpaid balances on your credit cards.

After you tally up your debts, your last assignment is to subtract your total debt from your assets. The difference between the two would provide you with your net worth.

It's a good idea to calculate net worth at least once a year. It's one statistic that clearly tells you how you're doing and where you're headed.

Q: Where can I find a place that would tell me the highest rates of interest paid on bank CDs?

-- I.J., Chicago

A: Visit the www.bankrate.com Web site. Pages in "Money" magazine also publish the top-yielding CD rates. Many local newspapers also publish lists of banks with the highest-yielding CDs. Online banks, including ING Direct and IndyMac Bank, routinely make the top 10 of such lists. So your next question might be, "Can I invest in a CD at a bank that I'm not likely to ever see, or would I prefer keeping my money at a bank that's close to my home?"

Matthew Lubanko is a financial columnist for The Hartford Courant, a Tribune Co. newspaper. E-mail him at yourmoney@tribune.com.